“This Is Tough, But Done For the Wrong Reasons”: The Economist Arun Kumar on Demonetisation and Black-Money Generation

On 8 November 2016, in an unexpected late-evening message on television, Prime Minister Narendra Modi announced the government’s decision to pull Rs 1000 and Rs 500 notes from circulation, making them invalid for most transactions starting that midnight. The purpose of demonetisation, he said, was to “fight against corruption, black money, fake notes and terrorism, in this movement for purifying our country.” The move has dominated the news since then—several reports have emerged of the distress caused by it, especially to the sizeable population that carries out its day-to-day dealings in cash. The consequent toll it has taken on banks and ATMs across the country has further exacerbated the situation, and is expected to continue for some time—on 12 November, the finance minister Arun Jaitley stated thatthe government had not calibrated the ATMs for the new currency, and that the process would take at least two or three weeks to complete. The demonetisation has also led to a debate on its effectiveness in restricting the black economy and on whether the government acted too hastily, catching even policy insiders by surprise.

Long before kaala dhan or black money became part of common parlance in the 2000s, Arun Kumar, an eminent economist, doggedly pursued the subject in the 1980s and 1990s. Kumar taught at the Centre for Economic Studies and Planning at Jawaharlal Nehru University, and, in 1989, had played a role in drafting VP Singh’s election manifesto. In 1999, he published a major work, titled The Black Economy in India. Kumar's work is among the most authoritative accounts of the extent of problem caused by the black economy in India. On 12 November 2016, Manas Roshan, an independent journalist, spoke to Kumar. Roshan and Kumar discussed the consequences of demonetisation, how black income is generated in India and other methods by which governments can best tackle corruption and black money.

Manas Roshan: Do you think the Modi government’s decision to demonetise large currency notes will curb the flow of black money or illegal wealth?

Arun Kumar: This will demobilise the stock of black wealth or a part of it, but it will not stop the flow. Because for that you’ve to stop black income generation. What happens in an economy is that you have an income, which you save, and savings are what accrue to form wealth. Income needs to be distinguished from wealth, and black money should be distinguished from black income. Black money is only a small part of the black wealth that has been accumulated.

MR: Can the effect of such a move be quantified? Data released by the Reserve Bank of India(RBI) in 2016shows that over 80 percent of the currency in circulation is in the form of Rs 500 and Rs 1000 notes, which is about Rs 13 lakh crore.